Iron Ore

5 charts for BHP, Rio Tinto and Fortescue investors to watch

Thu 07 Mar 24, 11:30am (AEST)
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Key Points

  • China's post-Lunar New Year demand and expectations of large stimulus have failed to materialise, weighing on iron ore prices
  • Macquarie's data reveals lackluster iron ore demand, poor steelmaking margins, declining coking coal prices, but still solid free cash flow yields for local miners
  • Despite recent turbulence, iron ore prices remain above short-term forecasts, with medium to long-term upside potential noted by analysts

Just three months into 2024 and the price action for iron ore has been nothing short of tumultuous – Starting the year at highs of US$144 a tonne, only to tumble to recent lows of US$114.

This rollercoaster has taken Fortescue (ASX: FMG) on a similar journey, which saw an almost 10% decline in the first three weeks of the year, followed by a V-shaped recovery back to all-time highs by early February.

Hopes of a sustained rally were dashed, however, as China's post-Lunar New Year holiday demand failed to materialise, compounded by the lack of large stimulus measures and sluggish economic data. Fortescue shares are down around 12% since February highs, to near four-month lows.

A recent iron ore note from Macquarie (6 March) sheds light on key trends and factors influencing iron ore prices. Here are some of the key takeaways.

#1 Lackluster iron ore demand

Chinese iron ore consumption fell as port inventories continued to rise.

"Apparent demand for both long and flat steel improved in line with normal post-holiday seasonality, and the pace of inventory build among both mills and traders slowed," said Macquarie analysts.

"Our recent February steel survey also painted a soft near-term outlook, which was partially attributable to the CNY holidays. Both steel and iron-ore traders expressed a more negative market outlook compared to last month, while steel mills remain split"

2024-03-07 10 11 34-Global Iron-ore Miners (2).pdf
Source: Macquarie Macro Strategy, March 2024
2024-03-07 10 14 58-Global Iron-ore Miners (2).pdf
Source: Macquarie Macro Strategy, March 2024

#2 Poor steelmaking margins

Margins for Chinese steelmakers producing rebar and hot rolled coil are currently below breakeven, indicating that the production of these steel products is unprofitable for manufacturers.

This scenario can arise due to various factors such as high production costs (e.g. costs associated with iron ore, energy and labour) and low selling prices due to market oversupply or weak demand.

2024-03-07 10 19 35-Global Iron-ore Miners (2).pdf
Source: Macquarie Research, March 2024

When margins are below breakeven, steel producers may curtail production or shut down facilities until market conditions improve.

#3 Coking coal prices have declined

Coking coal is an essential raw material in the production of steel. While iron ore prices have held up relatively well in recent weeks, coking coal prices have almost halved from highs of almost US$400 a tonne to US$220 a tonne.

2024-03-07 10 22 22-Global Iron-ore Miners (2).pdf
Source: Macquarie Research, March 2024

#4 Solid free cash flow yields

Macquarie says major iron ore miners under its coverage universe will generate solid free cash flows over the short-to-medium term. At current spot prices, FY24 free cash yields are 6% for BHP, 8% for Rio Tinto and 10% for Fortescue.

MinRes has a negative free cash flow yield for FY24 due to capital commitments for its iron ore and lithium businesses.

2024-03-07 10 27 49-Global Iron-ore Miners (2).pdf
Source: Macquarie Research, March 2024

#5 Iron ore outlook

Iron ore prices soared as high as US$144 a tonne in early January. "Financial flows have played a large part in this as the market sentiment was lifted by government stimulus headlines," says Macquarie.

"We note that February had an average price of US$125 a tonne, which was above our near-term forecast of US$115 a tonne," the analysts said, adding that "upside remains over the medium to longer term."

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Written By

Kerry Sun

Content Strategist

Kerry holds a Bachelor of Commerce from Monash University. He is an avid swing trader, focused on technical set ups and breakouts. Outside of writing and trading, Kerry is a big UFC fan, loves poker and training Muay Thai. Connect via LinkedIn or email.

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